PETDAG’s 1QFY23 results beat expectations due to strong volumes and favourable product prices. Moving forward, volumes may be hurt by the implementation of targeted fuel subsidies. On the flipside, the resumption of international flights may boost commercial fuel volumes. We raise our FY23F and FY24F net profit by 27% and 6%, respectively, lift our TP by 4% to RM24.90 (from RM24.00) but maintain our MARKET PERFORM call.
Soaring volumes led to earnings beat. 1QFY23 core net profit of RM301m beat expectations, coming in at 36% and 37% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from stronger-than-expected sales volumes, particularly at the retail segment.
Dramatic turnaround at the commercial segment. 1QFY23 bottom line more than doubled YoY following a 13% surge in sales volume. This was underpinned by higher retail demand (+15%) due to the festive season and school holidays. Furthermore, commercial volumes spiked by 10% post-opening of international borders since 2QCY22. Correspondingly, this boosted Jet A1 volumes and enabled a turnaround in EBIT contribution by the Commercial segment. The above, coupled with lower taxes and opex, led to the improved performance. This was in spite of subdued average selling prices (ASP) (+1% YoY).
Product price fluctuations worked to PETDAG’s advantage. On the other hand, QoQ expansion (+66%) was driven by the retail segment on the back of: (i) lower product costs, and (ii) 1QFY23 price trends that moved in PETDAG’s favour. Additionally, to a lesser extent, earnings received a kicker from lower opex at the Convenience segment. The above more than offset drag from lower volumes (-2%) and ASP (-7%).
Possible setback from targeted fuel subsidies. Moving forward, we are concerned of volume downside risk for PETDAG. This is given the government’s plans to implement targeted fuel subsidies next year. Following this, volumes may suffer a setback in the immediate term. Whilst we believe demand is elastic over the longer term, there may be a knee jerk reaction, resulting in lower consumption. Moreover, public transportation is emerging as a viable alternative given improved coverage and connectivity of mass transit lines, coupled with sustained government subsidies.
Beneficiary of revival in tourist arrivals. On the other hand, there is room for earnings expansion, as we believe that Jet A1 volumes have yet to revert to pre-pandemic levels. The company expects a revival of Malaysia’s tourism industry in 2023 will propel aviation fuel volumes. This is underpinned by projections that international air passenger arrivals in Malaysia will surge to 9.6m in 2023 (2022: 2.9m). In turn, this implies an increase in international flights, and hence consumption of aviation fuel. Therefore, volume growth traction for the commercial segment is expected to sustain in 2023 (2022: +20% YoY, 2021: -50% YoY).
Forecasts. We raise our FY23F and FY24F net profit forecasts by 27% and 6%, respectively, to reflect higher sales volume assumptions.
Correspondingly, we lift our TP by 4% to RM24.90 (from RM24.00) based on DCF valuation with a WACC and terminal growth assumptions of 10% and 1% respectively. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).
We like PETDAG: (i) for the stable demand for fuels as the economy normalises, (ii) given its strong balance sheet with a huge war chest of RM2.8b and stable dividends, and (iii) for its strong shareholder, i.e. the national oil company Petronas. However, its valuations are fair with limited re-rating catalysts. Maintain MARKET PERFORM.
Risks to our call include: (i) the full removal of fuel subsidies for all income brackets, (ii) the global economy slips into recession and derails recovery of international air travel, and (iii) weak tourist arrivals.
Source: Kenanga Research - 23 May 2023
Created by kiasutrader | Sep 27, 2023
Created by kiasutrader | Sep 26, 2023